Markman Capital Insight

Why Qualcomm Will Win The Augmented Reality Wars

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Judging by recent announcements, augmented reality is the next big thing in technology. This is how you should get ready.

Executives at Qualcomm (QCOM) announced on Tuesday that the firm will collaborate with Microsoft (MSFT) on next generation chips for lightweight AR glasses. This is a big deal.

Investors should consider buying Qualcomm shares.

This is not the first time Qualcomm and Microsoft have worked together. The Snapdragon 850 chips powers Microsoft’s HoloLens headsets. The goggle-like headset began life in 2010 as an expensive toy, a $3,000 add-on for the Xbox game console. The headset evolved to mixed reality industrial, and even military applications.

Microsoft announced in March 2021 that it was awarded a $21 billion contract to supply military-grade units to the United States Army.

The attraction of AR technology is hands-free operation. The ability to immediately see information in real-time makes a lot of sense for maintenance workers repairing power lines, or military recognizance officers out in the field. A really lightweight device might have even wider appeal.

That is clearly the market Qualcomm is focusing on.

At the Consumer Electronics Show in Las Vegas on Tuesday, Qualcomm ceo Cristiano Amon  revealed Snapdragon Spaces XR, a development platform that will integrate into Microsoft Mesh software for lightweight AR glasses. The last part is important. These devices are glasses, not goggles or a headset.

Moving into AR glasses would put Qualcomm and Microsoft in direct competition with Apple (AAPL). Tim Cook, chief executive officer told analysts in 2016 that AR could be huge and he promised then the Cupertino, Calif.-based company would invest accordingly. Since then Apple has filed numerous patents, bought start-ups, hired new product managers, and launched ARKit, its AR software developer kit. Apple’s AR glasses are clearly in the product pipeline.

The Cupertino, Calif.-based juggernaut sets trends.

The company launched AirPods in 2016 to widespread derision. The wireless white earbuds were expensive, had poor sound quality, and looked like a pair of golf tees dangling from the wearer’s ears. Airpods had all of the earmarks of a colossal failure. Then cool kids started wearing them. Apple might have sold 90 million pair during the final two months of 2021, according to Min-Chi Kuo, an analyst at TFI Asset Management.

Now Apple is about to make AR cool. Qualcomm is getting ahead of the wave of new buyers.

It’s wrong to assume Apple is the only logical winner as AR goes mainstream. Qualcomm won the high-end smartphone chip wars by making a microprocessor that worked well across the entire Android ecosystem. Today its Snapdragon family of processors are used in 70% of higher-tier Android smartphones, including most new Samsung devices, even though the Korean electronics giants makes a competing processor.

What Amon and his predecessors got right was integration and partnerships.

The deal with Microsoft continues in the tradition. The Redmond, Wash.-based software giant has the marketing muscle to scale lightweight AR glasses in the market.

In the interim, Qualcomm has a strong portfolio of chipsets across various sectors.

Qualcomm was a featured partner in January 2021 at Nio (NIO) Day. The Chinese carmaker revealed its ET7 sedan that features always-on network connectivity for high bandwidth/ low latency 5G, Bluetooth 5.0, Wi-Fi 6 and the full vehicle-to-everything user experience.

Apple also relies on Qualcomm for 5G modems. After several years of litigation the two firms inked a $4.5 billion deal in April 2019 to bring Qualcomm’s best-in-class wireless technology to iPhones and iPads. The license will last until 2025.

Qualcomm has been a strong trader in a turbulent market. Shares closed Tuesday at $187.23, less than 1% from record levels. The stock trades at only 16x forward earnings and 6.2x sales.

Given the strong prospects for growth in AR, these ratios look exceptionally cheap.